Although the Internal Revenue Service (IRS) only audited 0.3% of individual income tax returns in 2020, there is always the possibility that, due to some inconsistency in the returns, it tends to review the accounts and the financial information of a taxpayer in order to ensure that they complied with all tax laws.
From this perspective, it is advisable to avoid any type of signals that draw attention to certain elements in the declarations, since in this way the risk of receiving a letter demanding to present income and expense files is reduced.
The fear that prevails among taxpayers is so high that a large sector of them renounces claiming the tax exemptions to which they are entitled, considering that asserting their right could imply being called to account by the IRS.
It should always be kept in mind that after filing a return, the IRS has a limit of up to three years to initiate an audit, or up to six years in the event that a taxpayer has omitted 25% or more of their income.
Common mistakes in rounding numbers
Rounding the figures for income and expenses is the most common route to be called for review because the IRS punishes taxpayers whose balance does not balance.
Omission of all your income
The IRS receives copies of the W-2 and 1099 forms through which a taxpayer’s income is reported, so missing any will almost automatically be cross-checked.
The suggestion is to make sure no forms are missing, especially for those who have been self-employed for multiple employers or changed jobs mid-year.
Taking the home office deduction
Only taxpayers who are self-employed or independent contractors can take the home office deduction, since to qualify for this benefit it is necessary to use part of the home “regularly and exclusively” for business. Otherwise you will be under the sight of the IRS.
Report business losses
Occasionally a business may have more expenses than income, especially when it starts operations, but the IRS is suspicious of those who never report a profit.
In this sense, if a business has made a profit in three of the last five years, the IRS considers it as such and not as a hobby.
Report unusually large business expenses
The possibility of receiving notices from the IRS is very high if the expenses of your business are significantly higher than those of others of the same line of business.
It is advisable not to try to enter personal expenses in the declarations about activities related to work or a business.
evade trading
The sale of shares is subject to taxes, so taxpayers who sell their business shares are required to declare them, since avoiding it will lead to a call for review.
Assets and payments through digital cryptocurrencies
Due to the rise of cryptocurrencies, for two years the IRS has asked about virtual currency transactions on the first page of the Form, but most taxpayers leave the space blank, which can also lead to an audit if proven who made a transaction with cryptocurrencies.
Charitable contributions without proper documentation
Making tax-deductible donations is a common practice among taxpayers, but presenting this expense in the return without having a supporting document could be another reason to be audited.
make too much money
There is the possibility of having a dream year in financial matters, but when declaring it, you must carefully check how all the resources were obtained; otherwise an audit could ensue.
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